| 1. |
A business has earned average profit of Rs.4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:(i) Capitalisation of Super Profit Method, and(ii) Super Profit Method if the goodwill is valued at 3 years purchase of super profits.Assets of the business were Rs. 40,00,000 and its external liabilities Rs.7,20,000. |
|
Answer» (i) Capitalisation of Super Profit Method: Step 1: Calculation of Capital Employed: Capital Employed = Assets - External Liabilities = 4000000 - 720000 = 3280000 Step 2: Calculation of Normal Profit: Normal Profit = 3280000 x [10/100] = 328000 Step 3: Calculation of Average Profit: Average Profit = 400000 Step 4: Calculation of Super Profit: Super Profit = 400000 - 328000 = 72000 Step 5: Calculation of Goodwill: Goodwill = Super Profit x [100/Normal Rate Of Return] = 72000 x [100/10] = 720000 (ii) Super Profit Method: Step 1: Calculation of Capital Employed: Capital Employed = Assets - External Liabilities = 4000000 - 720000 = 3280000 Step 2: Calculation of Normal Profit: Normal Profit = 3280000 x [10/100] = 328000 Step 3: Calculation of Average Profit: Average Profit = 400000 Step 4: Calculation of Super Profit: Super Profit = 400000 - 328000 = 72000 Step 5: Calculation of Goodwill: Goodwill = Super Profit x Number of years' of purchase = 72000 x 3 = 216000 |
|